Can’t Repay Parent PLUS Loans? Here’s Your Guide

#1 Student loan lawyer

Updated on November 14, 2023

You took out a Parent PLUS Loan to help your child get a college education. But now you’re having trouble with the monthly payments. You’re far from alone—many other parents and student loan borrowers face similar problems.

Perhaps you’ve tried online calculators or talked to your loan servicer. They might’ve suggested switching to an income-contingent repayment plan. But even that option doesn’t bring down your monthly payments enough. You’ve even considered refinancing the loan for a lower interest rate. But that means you could lose special benefits like loan forgiveness programs, income-driven repayment plans, deferments, and forbearances offered by the U.S. Department of Education.

Don’t stress. In this article, we’ll guide you through 6 options for when you can’t pay Parent PLUS Loans.

What are Parent PLUS Loans?

These are a type of Direct PLUS Loans made to parents without an adverse credit history to help pay for their child’s cost of attendance at an eligible institution. These loans carry higher interest rates than other federal student loans and offer

1. Low-Income: Switch to the Income-Contingent Repayment Plan

The ICR plan caps your monthly payments at 20% of your discretionary income or the amount you’d pay under a 12-year fixed repayment plan—whichever is less. This plan also extends your repayment timeline to 25 years, forgiving any remaining balance afterward.

To become eligible, you must first consolidate your loans through a federal direct consolidation loan. You can apply for loan consolidation on the Federal Student Aid website, StudentAid.gov.

If the ICR payments are still unaffordable, look into the double consolidation loophole.

This advanced strategy lets Parent PLUS loans become eligible for more favorable repayment options like Biden’s new income-driven repayment plan, SAVE.

Related: Are Parent PLUS Loans Eligible for SAVE?

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Double Consolidation Loophole: Slash Your Parent PLUS Payments

2. High Earner: Change to the Graduated & Extended Repayment Plans

If you’re making more than $100,000 annually, income-driven repayment plans might not give you the relief you need.

Take one of my clients, for example. He owes nearly $1 million in Parent PLUS Loans and makes about $500,000 annually. Under the ICR Plan, his monthly payment is over $8 thousand. And if he did the double consolidation process, his payment would still be over $4 thousand. That might seem manageable on paper, but it doesn’t account for his other expenses like a mortgage, credit card bills, and medical costs.

If this sounds like you, look into Graduated or Extended Repayment Plans.

These plans stretch your repayment term from the standard 10 years to as long as 30 years, depending on your loan balance. Yes, you’ll pay more interest over time, but your monthly payments will be more manageable.

Remember, choosing these plans isn’t forever. You can use them for a short period—maybe until you retire and your income decreases. Then, you can switch to an income-based plan that suits your new financial situation.

3. Refinance With a Private Lender

If your parent PLUS loan payments are too high, but you don’t have money troubles for the long haul, think about refinancing. Doing so swaps your old loan for a new one, usually with better terms like a lower interest rate.

Lowering your interest rate through refinancing can make your monthly payments smaller and save you money eventually.

To qualify, you need a few things:

  • A good credit score (usually 680 or higher)

  • No bad marks on your credit history

  • A steady job with a regular income

You can use an online marketplace like Credible to shop with many lenders at once.

While grabbing a lower interest rate sounds nice, refinancing has a drawback: It turns a federal loan into a private student loan.

That means you lose special perks, like adjusting your payment based on your income, pausing your payments if you run into hard times, or qualifying for loan forgiveness programs like Public Service Loan Forgiveness and the Income-Driven Repayment Waiver.

Related: Are Parent PLUS Loans Eligible for PSLF?

4. Tap Into Your Home Equity

If you own a home and have built up some equity, consider using it to pay off your student loans. Private lenders often let homeowners tap into their home’s value to pay off various types of debt, including student loans. This is known as cash-out refinancing.

When you choose cash-out refinancing, your mortgage amount increases, letting you access extra cash you can use to pay off your student loans. But tread carefully; failing to make the new, higher mortgage payments could put your home at risk.

This approach isn’t for everyone and comes with its own set of financial implications. It’s a topic worth exploring if it piques your interest, but weigh the pros and cons carefully.

5. Transfer the Parent Loan to a Spouse or Child

If you can’t pay, but your spouse or child can, consider having them refinance the Parent PLUS Loan in their name with a private lender. Your spouse or child can transfer the Parent PLUS Loan into their name if they have a good credit score (e.g., 680+) and a steady income showing they can pay back the college debt plus their living expenses.

If your spouse or child can’t qualify to refinance Parent PLUS Loans, they may still be eligible with a cosigner.

And if that doesn’t work, they still can help with the payments.

Paying for a child’s education falls on the shoulders of both parents. Plus, even though children are not responsible for Parent PLUS Loans, the money was used to pay for their college education. So, they likely feel a responsibility to help with the parent loan payments.

As the parent borrower, you remain legally required to pay the PLUS loan until it is transferred. But getting help from family can help repay the loan.

Related: What Happens to Parent PLUS Loans When You Die?

6. Pause Payments Temporarily

Sometimes, life throws you financial curveballs. If you’re facing financial hardship and can’t afford the payments under IDR or Extended/Graduated plans, the US Department of Education allows a temporary pause on your loan payments. This is known as deferment or forbearance.

Related: How to Defer Parent PLUS Loans

Forbearance isn’t ideal for long-term financial planning due to accruing interest and capitalization. Still, it can be part of a short-term strategy. The government allows a set number of forbearance months for each loan.

But a lesser-known strategy could offer more relief: the forbearance consolidation loophole. Implementing this tactic requires some strategic planning.

Here’s how it works: Once you’ve exhausted the forbearance period on your current loans, you can combine them into a new federal loan. This new loan comes with its own set of forbearance months, effectively ‘refreshing’ your ability to pause payments.

Be cautious with this strategy, as continually using forbearance and consolidation will increase your loan balance.

Consequences of Not Paying Parent PLUS Loans

Falling behind on your Parent PLUS Loan payments puts you in a situation called ‘delinquency.’ If student loan delinquency continues for over 270 days, your loan status escalates to ‘default,’ with far-reaching consequences. To give this context, a startling 20% of Black Parent PLUS borrowers default, compared to just 5% of white borrowers.

Many parents are acutely aware of the domino effect that missed payments can have on their credit scores. While it’s worrisome, fortunately, delinquency won’t hit your credit report until you’ve missed payments for 90 days or more. But if this trend continues, you risk defaulting, which can severely affect your financial standing.

Beyond the credit score, there’s the harsh reality of wage garnishments and potential legal action. As of 2015, 40,000 disabled or retired Parent PLUS borrowers had their Social Security benefits partially withheld due to default on their loans.

Suppose you’re concerned about managing payments as they resume. In that case, you should know a temporary on-ramp period that lasts through September 30, 2024. This grace period offers relief by holding off on the worst consequences of nonpayment, such as negative credit reporting, for up to twelve months. Still, interest continues to collect on your loan, making it imperative to consider other repayment options.

Bottom Line

Parent PLUS Loans come with their own set of challenges, such as high interest rates and limited repayment options. Failing to make payments can lead to severe financial consequences, including a loss of eligibility for further financial aid. But as we shared above, various strategies can make your student loan payments more manageable.

If all else fails, bankruptcy remains an option—although a difficult one. While the federal government has made it challenging to discharge student loans, Parent PLUS Loan bankruptcy is possible under specific conditions like proving undue hardship. We’ve successfully guided clients through this process, helping them eliminate some or all of their loan debt.

Book a consultation with our team if you’re seeking tailored strategies for managing your Parent PLUS Loans or other student loan debt.

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FAQs

What Happens If You Can’t Pay Back a Parent PLUS Loan?

If you fail to pay back a parent PLUS loan, you risk defaulting after missing 270 days of payments. Acting quickly to restore your loan’s good standing is essential when this happens. For federal parent PLUS loans, there are three primary paths out of default: immediate repayment of the owed amount, entering a loan rehabilitation program, or choosing loan consolidation.

Do Parents Have to Pay Back Parent PLUS Loans?

In a Parent PLUS Loan arrangement, the legal obligation for repayment falls on the parent. While you can informally agree with your child for them to make the payments, the ultimate responsibility remains yours if they fail to repay.

What Happens to Parent PLUS Loans If a Student Withdraws?

If a student withdraws, the parent PLUS loan repayment isn’t directly affected. Repayment starts once the loan is disbursed, although parents can choose deferred payments until six months after their child is no longer enrolled. After this grace period ends, payments are due, and your loan servicer will put you on a standard repayment plan.

How to Lower Parent PLUS Loan Payments?

To reduce Parent PLUS Loan Payments, consider these options: 1) Income-Driven Repayment Plans, although parent PLUS loans require consolidation first; 2) Loan Refinancing, which may offer lower interest rates; 3) Extended Repayment Plans, which lengthen the loan term; 4) Graduated Repayment Plans, with payments that start low and go up. Consult your loan servicer for personalized guidance.

How Do I Get Out Of My Parent PLUS Loan?

You have limited forgiveness options like the PSLF Program or Income-Based Repayment Forgiveness to exit a parent PLUS loan. Each route has specific eligibility criteria. For example, PSLF requires 120 qualifying payments and full-time employment with a government or nonprofit employer.

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